October 1995 Bulletin

Position Statement - Principles of Medicare Reform

Medicare is the Federal health insurance program for the nation's
elderly. Part A of the program covers inpatient hospital services,
inpatient care in skilled nursing facilities after hospitalization,
home health care and hospice care, among other services. Part
B of the program covers physician services, outpatient hospital
care, diagnostic services, durable medical equipment and ambulance
services, among other services.

According to government projections, the Hospital Insurance Trust
Fund, which finances Part A of the Medicare program, will be depleted
by the year 2002. Spending on the Part B portion of the program
may double in the next seven years. By the year 2000, the entire
Medicare program may add as much as $150 billion to the total
annual Federal deficit, nearly three-fourths of the current total
annual deficit.

Factors causing the growth in Medicare costs include but are not
limited to:

a 50 percent increase in the number of beneficiaries since the
start of the program,

an increase in the life span of beneficiaries, which increases
the number of years that they use medical services,

advances in medical science and technology that prolong and
enhance the quality of life but may
be costly,

increased beneficiary demand for services due, in part, to the
availability of Medigap first dollar insurance coverage, and

provider fraud and abuse.

The American Academy of Orthopaedic Surgeons believes that
the Medicare program needs fundamental reform because of its impending
financial crisis which will threaten patient access to medical
care. To achieve Medicare reform, the Academy believes that policy
makers must undertake a thorough review of all program components,
including health care delivery and benefits, payments to providers,
and financing.

Health Care Delivery and Benefits

Medicare Managed Care

Many policy makers are now calling
for the expansion of managed care into Medicare as a way to cut
costs even though there is no reliable evidence yet
to indicate that such an expansion would result in any savings.
Since the Medicare population is generally less healthy and more
expensive to treat than the younger population, the rapid expansion
of a new and evolving health care delivery system into Medicare
may adversely affect the quality of care and access to appropriate
providers.

The Academy believes that if managed care is expanded in
the Medicare program, there should be effective patient protection
measures to ensure that quality and access are not jeopardized.
Among these measures should be the following:

Point-of-Service: The Academy believes that every managed
care plan should be required to have a point-of-service feature
automatically built into it that would allow patients access to
any physician of their choice outside the plan for medically necessary
services at a non-prohibitive additional co-payment. If a managed
care plan provides care that the patient finds unsatisfactory,
that patient would have a means to seek care outside the plan.
The frequency at which the point-of-service feature is used can
also help the managed car plan better evaluate patient satisfaction
with its services.

Prohibition of Incentives that Interfere with Medical Judgment:
The Academy supports existing Federal law that prohibits managed
care plans from operating a physician incentive program containing
direct or indirect inducements to reduce or limit medically necessary
services or patient referrals for such services.

Full Disclosure to Enrollees: The Academy believes that
every managed care plan should be required to provide all prospective
and current enrollees with easily understood written information
describing the terms, conditions and benefits of the plan. Managed
care plans should also be required to provide this information
to enrollees verbally, at the request of enrollees.

Managed Care "Opt Out": The Academy believes that
Medicare beneficiaries who leave a managed care plan at the time
of re-enrollment to join another plan or to return to the standard
fee-for-service system should not experience delays in receiving
benefits.

Limits on Managed Care Administrative Costs: Managed care
plans vary greatly in regard to administrative costs and the amount
of revenues devoted to patient care. The Academy believes that
public funds should not be used to boost the profits of managed
care plans at the expense of patient care. In order to eliminate
excessive administrative costs, managed care plans which do not
spend at least 85 percent of the premium dollar on patient care
should not be allowed to enroll Medicare beneficiaries.

Pre-selection of Enrollees: The Academy believes that managed
care plans should be prevented from pre-selecting or "cherry
picking" lower risk beneficiaries so that adverse selection
does not occur in the standard fee-for-service system and so that
all Medicare beneficiaries would have equal access to the full
range of health care options.

Quality Standards: The Academy believes that there should
be minimum standards that managed care plans must meet in order
to enroll Medicare beneficiaries. These standards should be established
by private sector organizations, such as medical societies, hospital
associations, insurers and managed care organizations , accrediting
agencies, employers, and patient groups, working in partnership
with one another and with the Federal government.

Privatization

A solution to the Medicare financial crisis could involve privatization
of part or all of the program. Privatization could reduce costs
and shift much of the financial risk in patient care from the
Federal government to the private sector. It would also give beneficiaries
a wider range of health care options from which to choose.

One approach is for the Federal government to give beneficiaries
defined contributions based on individual income and health status,
among other factors. These contributions would be used by beneficiaries
to choose from a range of private plan options or the standard
fee-for-service system with the government continuing as the insurer.

As a long-term approach, today's under age 65 working population
should be permitted to have Medical Savings Accounts (MSAs) for
their
retirement. As members of this population become eligible for
Medicare, they would still receive government contributions, but
they would also be able to use funds from their MSAs to enhance
their health care purchasing power (e.g., purchase health care
coverage at a cost that exceeds the amount of the government contribution).
MSAs also would make future beneficiaries less dependent on the
government contribution. This is important because there is no
guarantee that future government contributions will be high enough
to meet even one's basic health care needs.

The Academy believes that policy makers should give serious
consideration to privatizing all or part of the Medicare program.

Payments to Providers

Cuts in Payment

Cuts in payments to providers have been the traditional means
by which government policy makers have sought to curb Medicare
spending. From 1981-1993, Medicare payments to hospitals and physicians
were cut by $98 billion. Physician payments, which account for
23 percent of total Medicare expenditures, have been cut by 32
percent through such measures as fee freezes, fee reductions,
limits on balance billing, and implementation of the "resource-based"
payment system.

Medicare payment rates have fallen sector. If
current trends continue, by the year 2004 Medicare reimbursement
will drop well below 50 percent of private sector rates, making
severe access and quality problems probable as providers attempt
to deliver care below their actual costs.

The Academy believes that further cuts in payments to providers
will threaten access to quality care. The Academy also believes
that the short-term savings gained by cutting physician and hospital
reimbursement will not solve Medicare's long-term financial crisis.

Graduate Medical Education Funding

The Federal government, through Medicare, is the largest financial
supporter of graduate medical education. The private sector contributes
to graduate medical education by paying the higher charges of
teaching hospitals. In recent years, however, the private sector
has become less willing to pay these higher charges. If the Medicare
program involves more managed care and/or privatizes, support
for graduate medical education may decrease significantly, threatening
quality and access for all Americans.

In addition, Medicare's current funding formulas for graduate
medical education have led to increases in the number of trainees,
which may not be consistent with the nation's current needs.

The Academy believes that a mechanism needs to be developed
to ensure that all payers contribute equitably to graduate medical
education funding. In addition, a mechanism should be developed
to ensure that the number of residency positions funded through
Medicare and other payers actually reflects the nation's health
care needs.

Fraud and Abuse

Fraud and abuse account for an undetermined amount of wasteful
spending throughout the Medicare program, threatens the health
and welfare of patients and undermines the mutual trust and respect
which is at the core of the provider/patient relationship.

The Academy strongly supports and will continue to cooperate
in efforts to eliminate fraud and abuse in the Medicare program.
The Academy will also continue its educational efforts to address
this issue.

Financing

The way in which Medicare is financed will also have serious consequences
for patient access to quality care.

Currently, Medicare Part A is supported by a 2.9 percent payroll
tax on annual wages. Part B is financed through general revenues.
Both parts are also funded through contributions from beneficiaries
in the form of premiums (Part B), deductibles (Parts A and B)
and co-payments (Parts A and B).

When Medicare began in 1966, Part B premiums paid 50 percent of
program costs and Part B deductibles paid about 45 percent of
the average charges for medical services. Today, Part B premiums
pay only about 26 percent of program costs and deductibles pay
less than 5 percent of average charges. While consumer prices
have more than tripled between 1966 and 1993, the Part B deductible
has only doubled from $50 to $100 per month. There is no premium
for Medicare Part A and there is no co-payment required for home
health, clinical laboratory, pathology and skilled nursing facility
services.

As contributions from beneficiaries have gone down in relation
to costs, these costs have been covered, increasingly, by working
people under age 65 through higher general revenue taxes. This
financial burden on younger working people is compounded by the
fact that the number of workers is shrinking in proportion to
the growing number of Medicare beneficiaries. Moreover, many young
workers are not able to afford their own health insurance, yet
must contribute their taxes to Medicare coverage for the elderly.

The Academy believes that most beneficiaries should assume
greater cost-sharing responsibility for the Medicare program,
with protections for low income beneficiaries, in order to preserve
their access to quality care. The following options for financing
reform should be considered by policy makers:

Indexing Part B premiums to maintain beneficiary cost-sharing
at a level at least equal to or higher than today's level.

Reducing the subsidy for Medicare Part B premiums for
high-income beneficiaries so that they assume a greater share
of program costs.

Increasing Part B deductibles and indexing them to maintain
beneficiary cost-sharing at a constant level.